Markets & Research
Taking stock of demographics and financial markets
Stephen Green

As the world grows older, fundamental research could play an even more important role in spotting promising investments.

We’re all getting older. Sure, that’s a tired saying, but it’s also a plain truth with real impacts. As we age, we tend to change how we plan, spend and invest. But individuals aren’t the only ones getting older; in many nations, the average age is ticking higher, too. And like individuals, populations adjust their financial habits as they age, sometimes at a scale that can collectively influence markets, economies and government policies.

Some age-related changes are intuitive. In general, older people ramp up spending on medical care; they also tend to cut back on apparel and automobiles. Other changes are more nuanced. Consider productivity: A larger share of retirees means fewer workers, relatively speaking, to keep factories and offices humming. Similarly, older cohorts are typically associated with reduced investment, as retirees tend to spend down their assets.

Demographic trends can be noteworthy over the long term, with the potential to affect industries and sectors in different ways. For example, people 60 years and older spend about twice as much on health care as their younger counterparts. That could provide a tailwind to medical companies amid rising global demand for everything from pacemakers to cancer medications.

Of course, demographic trends are just one of many factors that can sway economies and markets. Other forces — technological advances, government policies and even the famously inscrutable predilections of the baby boom generation — can have a significant impact despite being tough to forecast. And by their very nature, demographic adjustments are slow-moving, with trends sometimes taking decades to play out.

Nonetheless, it’s important to keep an eye on underlying trends. Here’s a quick look at some of the demographic dynamics that could be influential moving forward.

Populations are getting older just about everywhere.

The world’s median age — where half the population is older and half is younger — has been edging up for some time. Developed nations tend to be older; Japan leads, with the United Nations forecasting the country’s 2020 median age at 48.4. That compares with the projected global median of 30.9. Emerging markets are often younger: India’s projected median is 28.4.

Historical and projected median ages around the world

Historical and projected median ages around the world

Economists look at other demographic measures, including the ratio of young and retirement-age people to working-age people. Those figures tell a similar story: The global share of workers has been shrinking since 2014, an inflection that many developed markets reached decades ago. That could weigh on productivity — it doesn’t matter how many jobs are open if there aren’t enough people in the labor force to fill them. Meanwhile, in places where the share of workers is expanding, the growth rate is often slowing. Even in youthful India, for example, the growth of the country’s older population is expected to start outpacing that of its workers in 2028.

These changes may accelerate in coming years, in part due to favorable societal patterns. Longevity is increasing, thanks to medical and technological advances, and global fertility rates are falling as education improves and family planning becomes more common.

In the U.S., the median age is still a spry 38.5, although it faces upward pressure due to the sheer number of baby boomers. That generation, born in the jubilee years after World War II, is still one of the country’s largest demographic cohorts. Over the next few decades, boomers will likely continue to have an outsize effect on U.S. markets and the investing landscape.

An older world could be a slower world.

So what could all this mean to the global economy and financial markets? There are a few potential impacts.

First, an older global population could have a dampening effect on overall economic growth. A smaller share of working-age people could constrain productivity, while the expectation of slower growth could itself prompt businesses to scale back capital spending.

Share of the U.S. population that is 65 or older, 1950 to 2050

Share of the U.S. population that is 65 or older, 1950 to 2050

In theory, that should weigh on overall equity returns. However, it could also boost the appeal of certain industries and businesses with strong organic growth. In other words, even if the overall tide rose less robustly, certain boats could be lifted powerfully. Older groups tend to spend more of their income on health care and travel, for example, so older populations could be a net positive for those industries.

In the fixed income market, aging economies could hold down interest rates, meaning the current era of low bond yields could persist. The implications could go well beyond limited payouts for bondholders: Extended periods of inexpensive debt have been associated with asset bubbles and “zombie” businesses that trudge on despite poor fundamentals and limited growth opportunities.

Overall, many factors will affect economic growth and investment returns in coming years. But the importance of fundamental research to pinpoint appealing investments could become even more pronounced. The ability to decipher the likely impact of demographics and other factors — as well as to identify companies that could benefit from those trends — could become more important than ever.

Stephen Green is an economist covering Asia. He has 16 years of investment industry experience as of 12/31/20. He holds a PhD in government from the London School of Economics and an honors degree from Cambridge. 

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